Canada’s oil and gas sector at a crossroads - again

In the midst of an oil crisis, construction starts on Keystone XL pipeline

With so many Canadian companies facing an existential threat, and too few ventilators, has the climate crisis, followed by the COVID-19 crisis, followed by an oil crash crisis provided Canada with the opportunity to pull the plug on Canada’s oil and gas sector and let it die?

That is the hope of anti-fossil fuel activist groups like Stand.earth and Dogwood, which participated in a virtual rally April 3 and launched a petition calling on Ottawa to reject calls for an emergency liquidity package for the oil and gas sector, which is experiencing what the International Energy Agency calls “a shock like no other in its history.”

That shock is a one-two-three punch that started with a uncertain long-term future -- due to climate change policies, decarbonisation and fossil fuel divestment -- and shorter-term, but severe, shocks from the COVID-19 virus, resulting in a temporary shutdown of the global economy and steep fall in demand for oil and gas, and a price war between Saudi Arabia and Russia that drove oil prices down 60% in a matter of days.

The shock has exposed the vulnerability of countries, states and provinces that depend heavily on oil and gas for their economic prosperity, raising questions about whether governments should prop the industry up in the current downturn, or surrender to Russia and Saudi Arabia.

But given that oil and gas accounts for about 8% of Canada’s gross domestic product, its single most valuable export, and an estimated 800,000 direct and indirect jobs nation-wide, Canada needs the oil and gas sector as much as it now needs Canada, if it hopes for an economic recovery, said Alberta Energy Minister Sonya Savage.

“The country will not recover without a strong energy sector,” Savage said today at a virtual energy conference sponsored by Scotiabank and the Canadian Association of Petroleum Producers (CAPP).

“The Canadian oil and natural gas industry was the economic engine that pulled Canada out of the great economic recession of 2008,” added CAPP CEO Tim McMillan. “And we can do it again.”

Alberta Premier Jason Kenney said unemployment in Alberta is expected to hit 25% -- 500,000 out of work – which is on the level of the Great Depression.

To shore up the industry through what is hoped to be a short-lived crisis, the Alberta government has offered more than $100 million to help oil land gas producers cover costs, and recently announced that the long-delayed Keystone XL pipeline is now under construction, thanks to a $7.5 billion commitment in equity and loan guarantees from Alberta.

“I am pleased to report construction is already underway,” said Kenny, a keynote speaker at the conference.

Savage expressed optimism that Ottawa would be forthcoming with an aid package for Canada’s oil and gas sector in the coming days, once it had dealt with the more immediate problem of getting money into the hands of roughly 2 million Canadians who have been laid off.

Oil and natural gas production is not just an Alberta story. It is also important to the economies of British Columbia, Saskatchewan and Newfoundland, and the Canadian economy more generally. (CAPP estimates that Alberta's oil sector generates close to $600 million annually for B.C. service companies.)

The industry is also important to Canadian banks, which are heavily invested in the Canadian energy industry, Kenney said.

Alberta is in a particularly hard spot right now. Its oil and gas sector was just starting to recover from the last oil price shock, and expected to invest $2 billion this year. Much of that investment won’t happen now, as producers have announced hundreds of millions of dollars worth of reductions from their 2020 spending plans.

The oil and refining industries have been hammered by a sharp and sudden decline in the demand for oil and refined fuels, as the global economy voluntarily shuts down to contain the COVID-19 pandemic, and an equally sudden and sharp drop in oil prices – the result of a price war between Saudi Arabia and Russia.

Globally, 5 million barrels of oil per day is not fetching a price that makes it worth producing, says the IEA.

“These operators are now losing money on every barrel they produce," the IEA said in a recent brief.

And oil producing countries will see revenue from oil fall from $287 billion in 2019 to $70 billion in 2020, the IEA estimates, which means there will be tremendous international political pressure to resolve the price war.

Talks are expected to take place this week with OPEC members, and for the first time there is serious talk that non-OPEC members, like the U.S. and Canada, could agree to cut oil production, along with Saudi Arabia and other major producers to bring oil prices back up.

Asked if Alberta would agree to production cuts, Kenney said, “If we see progress towards a global consensus by producers….we’ll keep an open mind.”

But even if some agreement is struck, and oil prices move back up, the demand won’t, at least not for several weeks or months. Most countries are still in the middle of a pandemic lock-down, which means a continued low demand for oil, gasoline and jet fuel for the foreseeable future, as large swaths of the world’s population stops driving and flying.

If an agreement isn’t reached, Kenney said he thinks Canada and the U.S. should respond to Saudi Arabia’s “predatory dumping” with tariffs.

There is some irony that, in the midst of the current crisis, Alberta’s oil sector is now getting what it has demanded for a decade or more: new pipelines.

Construction is underway on the $12.6 billion Trans Mountain pipeline expansion, and, just this week, construction started on the $8 billion Keystone XL pipeline project.

TC Energy Corp. (TSX:TRP) announced at the beginning of April that construction has already started in Northern Montana near the Canadian border on the long-delayed pipeline project, following Alberta’s announcement it will take a $1.5 billion equity stake in the project, and provide $6 billion in government guaranteed loans.

That news has been greeted with a noticeable absence of outcry from activists, who are now confined to virtual protests, due to the pandemic. Savage said she didn’t think Canadians will have much patience with protests against a project that is expected to create 7,000 jobs in the current economic climate.

As for the Trans Mountain pipeline expansion, now that Keystone XL is underway, Kenny now seems less interested in, or optimistic about, its completion. He said Keystone XL is the more important project for Alberta.

“I hope the TMX happens, but I’m not prepared to bet the future of Alberta on that one project,” he said.

“This (Keystone XL) is our hedge against risk of the non-completion of TMX. And it’s a bigger project. It’s at least 830,000 barrels of oil a day of heavy crude, and we know that the Gulf complex refineries in the U.S. are hungry for our kind of heavy.

“They’re not going to get it from Venezuela or Mexico, and I think the Saudis have overstepped themselves in this price war – that U.S. producers are going to be a lot more cautious about importing overseas energy.”

In addition to asking the federal government for emergency “liquidity” for oil and gas companies, Kenney said his government is also pushing a “do-no-harm” approach that would postpone a number of new federal regulations, like a federal low carbon fuel standard and new methane regulations.

“We think we’re getting a more sympathetic ear on that than we have in the past,” Kenney said.

See next week's issue for coverage of the impact of the pandemic and oil price crash on the Western Canadian natural gas and LNG sectors.